The voluntary carbon market: market failures and policy implications

Many companies have made environmental pledges and launched products that claim to be carbon neutral. In most of these instances, corporations rely on carbon offsets. In this Article, we investigate the functioning of the market on which these offsets are created and exchanged, namely the voluntary carbon market, and look into the question of whether and, if so, how it should be subject to regulation. We start by shedding light on the mechanics of this market and then explain why a well-functioning voluntary carbon market is necessary to fight global warming and can also help developing countries build less carbon-intensive economies. However, we also spotlight the conflicts of interest and imperfect information problems that plague the voluntary carbon market and prevent it from achieving its full potential. Further, we explain why the proposals advanced by some members of Congress to regulate this market are misguided. Finally, we offer a proposal that can contribute to improving the functioning of the voluntary carbon market, thus increasing the likelihood that firms will rely on high-quality offsets to reach their climate goals.